The “D” word – debt! It strikes fear into the heart of most consumers and business owners. However, there are valid reasons taking on debt can help your small business grow.
The Wall Street Journal recently posted an article about the benefits of debt in general:
“Taking on debt allows us to reach our aspirations—to acquire assets that are of value to us–such as a house, education, reliable transportation or starting a business. These things define the American Dream, and they are difficult to achieve without debt.”
But all debt is not created equal. Unfortunately, many small business owners take on expensive debt that cripples their cash flow. Defaulting on debt can ruin your credit score, making it almost impossible to qualify for low-cost funds in the future.
If you are struggling with cash flow, one way to get you through a difficult financial time is to refinance your business debt. Here’s are some basic points to help you learn more about this financial strategy.
The difference between debt consolidation and debt refinancing
Debt consolidation and debt refinancing are different. Here’s the difference:
Consolidation: This strategy combines multiple loans into a single one. So instead of being responsible for several separate loans, monthly payments, and billing statements, you bundle everything and handle it with one payment. Consolidation can also be called “simplification”.
Refinancing: When you replace one or more loans with a completely new loan with better rates and terms, you’re refinancing. Business owners going this route are interested in getting a lower interest rate to reduce interest costs and bring down monthly payments. When you refinance, you can pay off multiple loans with your new loan.
The benefits of refinancing business debt
There are three main reasons small business owners should consider refinancing business debt with a low-cost loan:
- Lower monthly payments
High monthly payments can severely impact your business. With business debt refinance, you’ll benefit immediately from lower monthly payments-often as much as 50% to 80%. The money you save can be put back into your business.
- Lower interest rates
The total cost of an expensive loan can be sky high. A new lower-cost loan decreases the interest rate, meaning you pay less for the money you’re borrowing.
- Positive Credit Score Impact
If you have multiple loans your credit score can suffer due to your credit utilization ratio. When you pay off high interest debt, this ratio will go down. The credit utilization ratio is typically focused primarily on a borrower's revolving credit. This is a calculation that represents the total debt compared to the total revolving credit the business owner has been approved for. To learn more about credit score calculation and the impact debt has on it, review this article from the SmartBiz® Small Business Blog: Your Personal Credit Score: What It Is, Why It’s Important.
When is the right time to refinance debt?
The right time to refinance debt is when you can qualify for a lower-cost loan. It’s important to know that there will be costs associated with a refinance. Make sure you’re aware of the following:
- Total cost and terms
- Annual interest rate
- Total finance charge
- Service fee
- Debt reduction fee
- Closing costs
Do the math to get the result you want from a refinance.
Options for refinancing existing debt
SBA 7(a) loans are known as the “gold standard” for good reason. They have low rates and 10-year terms. This leads to small monthly payments that are manageable and help you keep a handle on cash flow. SBA loans have gotten a bad rap in the past as being too time intensive. However, SmartBiz Loans® can help streamline the application process. To learn more about this debt consolidation option, visit the SmartBiz website here: Why SBA Loans?
Bank term loans
Bank Term loans are term loans meant to be repaid in a shorter amount of time than the 10-year term of a typical SBA loan. This type of loan can be a great way to get the funds you need until you are ready for an SBA loan.
The following Bank Term loans are available through SmartBiz marketplace banks for debt refinance. You can also use the proceeds for working capital and new equipment purchases:
- $30,000 to $200,000 loan amounts
- 2 – 5 year repayment terms
- Monthly repayments
- No pre-payment penalties
*Interest rate depends on loan term and the applicant's credit and financial profile.
Alternative lending is a broad term used to describe the wide range of loan options available outside of a traditional bank loan. Alternative lenders will consider borrowers who don’t qualify for bank loans due to time in business, poor credit, or other reasons. However, there’s a downside – and it’s important. Many alternative loans have high interest rates and short loan terms that can make them less suitable for low cost debt refinance.
For a deep dive into debt management, review these articles from the SmartBiz Small Business Blog:
Debt refinance examples
We frequently have the opportunity to speak with happy customers who have successfully obtained a low-cost loan from a SmartBiz marketplace bank for debt refinance. Hear from real customers about their experiences:
PixelCutLabs owner Brennen Bliss prefers not to borrow money. However, to get his business going, he had taken out high interest loans that were crippling his cash flow. He received a low cost SBA loan and is using the funds wisely. Bliss says, “We’re using the funds for debt consolidation. My advice is that if you can reduce your interest rates considerably, just do it. This loan is allowing us to stay alive and keep growing.”
Mary Grupka and Lisa Scibetta own an art studio catering to individuals and groups who want a fun night. Mary and Lisa used credit cards and a line of credit to cover the unexpected costs, planning to pay them back easily. However, they found themselves unable to get ahead on paying off the expensive debt.
Mary and Lisa secured a $100,000 SBA loan from a SmartBiz Loans marketplace bank with low rates and a ten-year term. They immediately put the low-cost funds to work. Mary says, “Our first step was debt consolidation. We were putting out $6,000 a month and now we’re paying $1,100 a month. It’s a significant savings. We’re staying ahead of the curve instead of just trying to keep up.”
Owner Milton Martinez had taken out two small business loans that he wanted to pay off. They required daily cash payments and were leaving him strapped. He needed to create additional income instead of paying high interest rates. “By getting rid of the two small loans I’m saving $15,000 – $18,000 dollars,” he says. “That’s money I can put back into growing my business or into savings.”
The SBA debt consolidation loans offered through SmartBiz marketplace banks can be used to refinance:
- Merchant cash advances
- Short-term business loans
- High-interest business loans
- Daily or weekly payment loans
- Business credit cards
To learn more about SmartBiz Loans and our streamlined application process, visit our website here. Check out the loan calculator to help you determine your monthly payment, APR with fees, and interest rate for a 10-year SBA loan.
For a deep dive into debt management, review this article: Business Debt Management: What You Need to Know.